In Capital by Thomas Pikketty, https://www.robertdkirkby.com/blog/2015/summary-of-piketty-i/, he states that World War I and World War II were the main reasons why the Capital Income to Labour Income ratio was lowered.

However, why is this the case if two world wars lead to capital destruction. Surely the remaining capital is more valuable? And possibly less is more labour to service this relatively than in the past.


1 Answer 1


First, important thing to note here is that $K/Y$ is not the capital income to labor income ratio, but ratio of capital to total income (or output which is macro-economically equivalent to income). $K$ is not an income derived from capital it is the stock of capital.

Wars destroy the stock of capital so even though returns to capital $r$ indeed increase the fall in the stock of capital makes the capital-income ratio fall.

Furthermore, the share of income going to capital is according to Piketty given by $\alpha = r \frac{K}{Y}$, and hence even if the rate of return increases when capital becomes more scarce the actual share of income going to capital might decrease if the capital-income ratio falls sufficiently to offset an increase in $r$.


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